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Business Development Company Update

Excessive fees lawsuit against adviser dismissed

KENNETH S. GERSTEIN, JOHN J. MAHON, PAMELA POLAND CHEN AND JESSICA A. FALZONE, SCHULTE ROTH & ZABEL

A decision issued on Jan. 24, 2017, in the U.S. District Court for the Southern District of New York dismissed a complaint alleging the payment of excessive advisory and administration fees by Prospect Capital Corporation (the “Fund”), a business development company (“BDC”) regulated under the Investment Company Act of 1940, as amended (the “1940 Act”). The litigation (“Prospect Capital”) involved a claim that fees received by the Fund’s investment adviser and the adviser’s affiliated administrator constituted a breach of the fiduciary duty established by Section 36(b) of the 1940 Act and sought to recover on behalf of the Fund damages resulting from the breach.

Although there have been numerous Section 36(b) lawsuits relating to registered investment companies, Prospect Capital is a rare Section 36(b) action brought against the adviser of a BDC. Moreover, the granting of the defendants’ motion to dismiss in Prospect Capital stands in contrast to decisions in most other Section 36(b) actions commenced subsequent to the 2008 decision of the U.S. Supreme Court in Jones v. Harris Assocs. (“Jones”), in which motions to dismiss were not granted.

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